Understanding Spurious Regressions in Econometrics

Peter Phillips

No 757, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper provides an analytical study of spurious regressions involving the levels of economic time series. As asymptotic theory is developed for regressions that relate independent random walks. It is shown that the usual t ratio significance tests do not possess limiting distributions but actually diverge as the sample size T approaches infinity. The Durbin-Watson statistic, on the other hand, converges in probability to zero. An alternative asymptotic theory is also analyzed. An alternative asymptotic theory is developed based on the concept of continuous data recording. This theory together with the large sample asymptotics that we present go a long way towards explaining the experimental results of Granger and Newbold (1974, 1977).

Keywords: Spurious regressions; random walk; asymptotic theory (search for similar items in EconPapers)
Pages: 29 pages
Date: 1985-07
Note: CFP 667.
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Citations: View citations in EconPapers (68)

Published in Journal of Econometrics (1986), 33: 311-340

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